Exam 2 Note Sheet

Exam 2 Note Sheet - - Realized income is income generated...

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- Realized income is income generated in a transaction with a second party in which there is a measureable change in property rights between parties. Gross income is realized income reduced for any excluded or deferred income. Taxable income is then derived from gross income by subtracting out any deductions or exemptions. -For AGI deductions are used for calculating AGI or come before AGI in the tax formula. For AGI reductions reduce gross income and therefore reduce taxable income dollar for dollar. From AGI deductions are used to determine taxable income. Deductions from AGI include itemized deductions, standard deductions, and exemptions. -borrowed funds do not have an economic benefit -The main differences between the two are (1) the relationship requirement is more broadly defined for qualifying relatives than qualifying children, (2) qualifying children are subject to age restrictions while qualifying relatives are not, (3) qualifying relative are subject to a gross income test while qualifying children are not, and (4) taxpayers need not provide more than half a qualifying child’s support (though the child cannot provide more than half of his/her own support), but must provide more than half the support of a qualifying relative. Also, in order to be a qualifying relative you cannot be a qualifying child. -portion of annuity payment included in gross income (1) investment in annuity contract (2) # of payments (3) ½ (4)amt of each payment Gross income per payment = (4) – (3) -How much income to recognize on a payment (1) investment in annuity contract (2) expected return multiple (3) amt of each payment (4) expected return = (2)x(3)x12months (5) return of capital% = (1)/(4) (6) return of capital per payment = (3)x(5) (7)tax income per payment (3)-(6) -property dispositions Sales proceeds Less: selling expenses Amount realized Less: basis(investment) in property sold Gain (loss) on sale -flow through entity – recognize % of business income and % of interest income, not distributions of cash -alimony – amount of payment is included in gross income of person receiving it and deductible for agi by person paying it (property divisions and child support are not alimony) -prizes, awards, and gambling winnings are included in gross income. Nobel peace prizes can be transferred to charity for an for agi deduction -Married filing jointly is generally preferred to married filing separately because couples combine their income and deductions and agree to share joint and several liability for the resulting tax. Couples who file separately each report the income he or she received during the year and the deductions he or she paid on a tax return separate from their spouse. Tax rate schedules and standard deductions for married filing separately are generally half for those filing joint in order to eliminate any extra tax benefits. -joint and several liability for tax means that they both are responsible to see that the tax is paid.
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Exam 2 Note Sheet - - Realized income is income generated...

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